CAL PASSES AGAIN ON BOEING LAUNCH CUSTOMER DEAL

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 004249

SIPDIS

DEPT PASS AIT/W, USTR
DEPT FOR EAP/TC
COMMERCE FOR ITA/MAC/ASIA/MBMORGAN CABLE BOX 4431
USTR FOR WINTER AND WINELAND

E.O. 12958: DECL: 10/19/2015
TAGS: EAIR ETRD TW
SUBJECT: CAL PASSES AGAIN ON BOEING LAUNCH CUSTOMER DEAL

REF: TAIPEI 2311

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d

Summary
--------------


1. (C) China Airlines has deferred decision on Boeing's
offer to sell it up to 24 of its new 747 Advanced model
under special terms as a launch customer. Boeing's Taiwan
representative blamed lack of focus among the members of
the Board of Directors and lack of support from the board's
Chairman. The latest developments are changing Boeing's
perception of the relative levels of support for Boeing
purchases from CAL's Chairman and President. CAL will
reconsider such a purchase early next year, but it may not
be able to get special terms as a launch customer. End
summary.

Positive Recommendation
--------------


2. (C) Boeing Commercial Airplane Group Chief Taiwan
Representative Paul Fang told AIT/T that Taiwan's China
Airlines (CAL) has again deferred decision on the
opportunity to be a launch customer for the new Boeing 747
Advanced. Fang had previously explained that Boeing's
proposal involved the purchase of as many as 24 aircraft at
a special rate. He also emphasized the publicity and
prestige associated with being a launch customer.


3. (C) On October 18, Fang reported that CAL's Board of
Directors formally considered Boeing's proposal in a
meeting three or four weeks ago. According to Fang, who
was unwilling to identify his source for information about
the meeting, CAL's Corporate Planning Division made a
positive presentation based on a thorough study of the
proposal. The presentation ended with the recommendation
that the board approve a plan to sign a memorandum of
understanding with Boeing agreeing to proceed with the
deal. Fang, his Boeing colleagues, and their contacts at
CAL felt confident the board would approve the
recommendation.

Board of Directors Lacks Focus
--------------


4. (C) However, Fang said the board was unable to reach a
consensus on the issue. He complained that the atmosphere
was not conducive to making a decision because the board
lacks understanding and focus. According to Fang, many of
the board members lack experience or even interest in the
aviation industry. He said that when the time came for the
board to make a decision, one member suggested waiting to
take a look at the airline's entire financial picture. At
that moment, the board members looked to Chairman Chiang
Yao-chung for direction. In Fang's account, the Chairman
did not say anything, and his reaction was interpreted as
an indication that he did not support the proposal.

Changing Perceptions of CAL Allies
--------------


5. (C) These events have led Boeing to reconsider their
assessment of which senior CAL executives most support
of Boeing aircraft purchases. Previously, Fang and his
colleagues had considered Chiang, with his engineering
background, to be a useful ally at CAL. On the other hand,
they viewed CAL President Philip Wei as an obstacle. Wei
has previously opposed Boeing sales in favor of Airbus and
has criticized Boeing products to AIT. However, the
positive recommendation from the Corporate Planning
Division must have been approved by Wei. Fang is not sure
of the depth of Wei's support for this proposal, but the
board would have assumed that Wei endorsed it. Chiang's
support is even more critical than previously because it
appears that he is exercising increasing control of CAL's
operations at Wei's expense. Recent personnel changes at
the Vice President level (reftel) reflect this change in
CAL's power structure.

Next Steps
--------------


6. (C) Because the board was unable to reach a definitive
decision at the last board meeting, Fang said that the
Corporate Planning Division will make another presentation
around the Lunar New Year (January 28, 2005). CAL contacts
have informed AIT/T that Chiang is currently out of the
country, so any prompt action on this deal is out of the
question. Boeing has informed CAL that the launch customer
deal may not be available if there is further delay, which
would mean significantly higher prices. In addition,
Boeing will not continue to hold production slots for CAL.
Fang said that Boeing is nearing a 747 Advanced launch
customer deal with Singapore Airlines that would eliminate
the need to keep the offer open for CAL.
PAAL